Beijing has announced that mainland investors will be allowed to invest overseas through approved banks under the so-called Qualified Domestic Institutional Investors scheme. While the move is clearly aimed at cooling the mainland's A-share market, its significance for the Hong Kong bourse may be bigger than that for the mainland. Central bankers have openly complained that excessive liquidity is to blame for the bull run on mainland stock markets that is showing dangerous signs of overheating. When it was launched last year, the QDII scheme was designed to divert the flood of liquidity. However, the decision to limit the scheme initially to currency and fixed-income markets made it highly unattractive to investors. The scheme's single-digit returns are nowhere comparable to what the A-share market can offer - stock values can multiply within weeks, if not days. Nor can the scheme's meagre returns offset the potential appreciation of the yuan. No wonder that only 3 per cent of the QDII quota has been used so far. By allowing mainland banks to invest clients' money in foreign equities, the regulators are hoping to enhance the QDII scheme's appeal. To this line of thinking, however, the market has already given a disappointing answer. As early as last month, the mainland's chief banking regulator, Liu Mingkang , had hinted the QDII restrictions would be relaxed. While at one time rumours of any such relaxation was an excuse for a market correction, Mr Liu's words caused barely a ripple. Indeed, since then the Shanghai A-share index has gained 17 per cent and turnover reached a new high. Liquidity has continued to flood into domestic mutual funds, forcing regulators to impose allocation quotas this week. It is hard to convince investors, largely bank savers, to put their money abroad when there has been a bull run at home and the yuan has kept rising over the past year. The implications for Hong Kong of the QDII scheme's expanded scope may be far more significant. The new rule requires banks to invest only in equities or mutual funds regulated by authorities that have signed an agreement with the mainland banking regulator. Hong Kong is the only market that meets the requirements. In the short term, it will provide an excuse for fund managers to re-rate mainland companies listed in Hong Kong, though the magnitude will be limited given the limited size of funds concerned. What matters are the long-term implications. Firstly, the new rule is tantamount to endorsing Hong Kong's regulatory standards, particularly in respect of asset management. Its significance to the development of the city into an international wealth management centre cannot be underestimated. Secondly, the extension of the QDII scheme, together with the Qualified Foreign Institutional Investor scheme, under which approved foreign financial institutions can invest in mainland stock markets, has made possible indirect, though limited, arbitrage between shares listed in both Hong Kong and the mainland. This would make the Hong Kong market a more relevant international pricing benchmark for mainland investors. It is also important to maintaining Hong Kong's attractiveness as the fund-raising platform for mainland enterprises, given increasing competition from Shanghai, where liquidity is ample and valuations high. Hong Kong officials take credit for the QDII scheme's relaxation. Their task now is to exploit the achievement to further shore up the city's status as the country's and the region's financial hub.